Kennedy-Wilson Holdings Inc (KW) 2018 Q2 法說會逐字稿

Good day, and welcome to the Kennedy-Wilson Second Quarter 2018 Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Daven Bhavsar, Director of Investor Relations. Please go ahead.

Thank you, and good morning. This is Daven Bhavsar and joining us today are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Mary Ricks, President and CEO of Kennedy-Wilson Europe; Matt Windisch, Executive Vice President of Kennedy-Wilson; and Justin Enbody, Chief Financial Officer of Kennedy-Wilson. Today's call is being webcast live and will be archived for replay. The replay will be available by phone for 1 week and by webcast for 3 months. Please see the Investor Relations website for more information.

On this call, we will refer to certain non-GAAP financial measures including adjusted EBITDA and adjusted net income. You can find a description of these items along with a reconciliation of the most directly comparable GAAP financial measure and our second quarter 2018 earnings release which is posted on the Investor Relations section of our website. Statements made during this call may include forward-looking statements. Actual results may materially differ from forward-looking information discussed on this call due to a number of risks, uncertainties and other factors indicated in reports and filings with the Securities and Exchange Commission.

I would now like to turn the call over to our Chairman and CEO, Bill McMorrow.

Thanks, Daven. Good morning everybody, and thanks for joining us today. We're pleased to report a record quarter of results for Kennedy-Wilson. We achieved our highest quarterly profits in our history, driven by industry-leading same property results, with NOI up 6% across our same property portfolio as well as significant gains from our asset sale program, which we reinvested into our share repurchase plan, new acquisitions and capital expenditures and to improve our existing properties.

So starting off with financial results. GAAP EPS was $0.77 for the quarter, up from $0.08 in Q2, 2017. For the first half of the year, EPS was $0.74 for the year, up from $0.09 in 2017. Adjusted EBITDA was $271 million compared to $102 million during Q2 of 2017. This brings our year-to-date total to $393 million compared to $180 million for the first half of 2017.

Adjusted net income for the quarter was $171 million, compared to $51 million in Q2 of 2017. For the year, adjusted net income totaled $234 million, up from $94 million for the first half of 2017.

We had a very strong quarter of property operations with same-store revenue growth of 5% and NOI growth of 6%, cost more than 18,000 multifamily units, 12 million square feet of commercial space and 4 hotels. In particular, our Mountain State apartment portfolio and our Southern California and U.K. office portfolios showed acceleration.

During the quarter, we had a focused capital deployment plan through which we invested $195 million of our capital, 68% of our capital was spend on share repurchases, 20% on new acquisitions, and 12% on value-add CapEx. In Q2, we repurchased 7.4 million shares at an average price of $17.90.

As of the quarter end, we had [$107] million remaining on our $250 million buyback program. We've been executing this buyback on a leverage neutral basis using gains from asset sales to fund our repurchases. For the year, we've invested $317 million of capital with 48% allocated to share repurchases, 33% to new acquisitions and 19% to value-add CapEx.

On the buy side in Q2, we and our partners completed $212 million of acquisition which our share was a $120 million. For the year, we have bought $510 million of assets, which our share was $272 million. Three multifamily assets we acquired this year, the Elysian in Dublin and Santa Fe in Creekview and Salt Lake, account for 73% of our total acquisitions.

These 3 assets all have significant value-add CapEx components to them. So after executing our business plan of these properties we expect significant increases in NOI, compare to the NOI in place that acquisition. This is typical of how we invest and add value to our properties. In fact, when you look at the assets we sold this year, we were able to increase NOI, is on average by 29% during the roughly 4-year hold period prior to their sale.

On the disposition side we sold $574 million of assets during the quarter which our share was $322 million. For the year, we've been a net seller with $743 million of dispositions which our share was $454 million. These sales have generated $327 million of cash to KW. The largest sale in the quarter was a 6-property apartment portfolio totaling 2200 units in the Western U.S., that we sold for $422 million. We had a 41% average ownership in these assets, which were originally built between 1989 and 1999.

KW realized an IRR of 35% on the sale of these assets, generating a $104 million of cash and realized gains in promotes of $71 million to KW. We also continued to invest our capital into our CapEx and development initiatives, where we were able to generate attractive returns. During the quarter, we invested $59 million of our cash into various value added initiatives. We currently expect to spend over $200 million of cash in the next 18 months to invest in our development and unstabilized assets as well as other value enhancing initiatives across our global portfolio.

Turning to the balance sheet, we closed the quarter with $447 million of cash and $500 million of availability on our undrawn revolver for a total of $947 million of liquidity.

In total our debt has a weighted average interest rate of 3.8%, weighted average maturity of 5.8 years with 77% fixed and 14% hedged to interest rate increases. Our term loan has a remaining balance of $125 million which we currently intend to pay off by year end.

Now I'd like discuss our near-term strategic initiatives: #1, is growing our NOI through lease-up of unstabilized assets and completing our development initiatives. In total of the $52 million of estimated annual NOI that we expect to add by year-end 2021, $36 million is expected to be in place by the end of 2019 and over 2/3 of that is either multi-family or pre-leased office developments.

We also continue to harvest gain selectively by selling assets where we have completed our business plan or that strategically don't fit for us long-term. We will continue to recycle the proceeds from our asset sale program into our CapEx initiatives, a buyback program and to fund our various investment platforms that will enable us to grow our business.

Turning to a more detailed portfolio review, we ended the quarter with a stabilized portfolio that is estimated to produce $427 million of annual NOI with 45% coming from the Western U.S. and 55% from Europe. Globally, multifamily and office continues to be our largest sectors making up 72% of that of the total portfolio, with our multifamily concentrated in the Western U.S. and Ireland, and our office mostly located in the U.K. and Ireland.

In the U.S., our target markets include Greater Seattle, Southern California and the Bay Area as well as Salt Lake City, Portland, and Boise. In Europe, our main target market consists primarily of Dublin, Ireland and the UK. We believe all these markets continue to offer an attractive long-term investment opportunity.

In the U.S., we currently have an ownership interest in over 21,000 apartment units, 5.2 million square feet of commercial properties, and a development pipeline that includes an additional 2,000 apartment units under construction or in design, plus another 2,000 that we are actively pursuing throughout our key Western U.S markets.

Our U.S. apartment portfolio accounts for 3 quarters of our U.S. portfolio by NOI, and continue to benefit from being well located within markets experiencing sustained job and population growth, resulting in strong demand for rental housing. Our market rate multifamily portfolio posted revenue growth of 5% and NOI up 6% on a same-property basis.

We continue to outperform other large multifamily public real estate companies which on average had NOI growth of 3% on a same-property basis during Q2. The Pacific Northwest, which includes Greater Seattle and Portland accounts for almost half of our U.S. multifamily portfolio and the region continues to perform well with quarterly revenue and NOI same property growth of 5%. As we highlighted during our sale of property tool in July, the suburban nature and relative affordability of our portfolio is positioned for continued growth.

For example, in Redmond, we own an asset that is right next to the Microsoft headquarters. Microsoft is undergoing a 5 to 7 year campus expansion to add another 8,000 employees. The Seattle market continues to be one of the highest in the country with housing supply failing to keep up with population and job growth.

With average rents of approximately $1600 per month would [probably] offers great value compared to the newer assets delivering mostly in the CBD.

We recently have been adding to our Mountain State multifamily portfolio which includes our assets in Salt Lake City and Boise, Idaho. In 2017, Idaho and Utah were ranked #1 and #3 in terms of U.S. population growth. Both the areas continue to benefit from strong underlying economic fundamentals and have a lack of housing for the growing population. You've seen the results of this come through our same property results with revenue and NOI growth of 8% in the quarter in these markets.

Our Vintage Housing multifamily affordable platform continues to perform above expectations. It has been 3 years now since we invested $78 million into this joint venture in Q2 of 2015. In the past 3 years, we've been able to grow our portfolio from 5,500 units to 6,400 units, while returning most of the original cash invested. We have only $14 million of cash basis remaining. We're looking to grow this portfolio to 10,000 units over the next few years.

Looking at our U.S. commercial portfolio for the quarter, occupancy grew slightly, while our share of revenue was up 14% and our NOI was up 15% on a same -- on a cash same-property basis. This was primarily driven by an office asset in Beverly Hills, which entered the same property pool this quarter. That asset had free rent in Q2, 2017. Excluding the effect of free rent in 2017, our Southern California commercial portfolio had revenue growth of 6% and NOI growth with 8%, a result of positive leasing at our office in retail assets.

In total, our stabilized U.S. office portfolio is 98% leased with an average lease term of 4.6 years.

Turning to Europe, we have a best-in-class portfolio that is concentrated in Dublin, Ireland and the U.K. With this, I'd like to turn the call over to Mary Ricks, President and CEO of Kennedy-Wilson Europe to provide more detail.

Thanks, Bill. Estimated annual NOI for the total European portfolio stood at $236 million at quarter end or roughly 55% of Kennedy-Wilson's stabilized portfolio. This was broadly flat from year-end, as positive leasing was offset by profitable disposals. .

Looking at the $52 million of additional estimated NOI by 2021, that Bill mentioned, a significant portion will be generated in Europe from our value-add and development initiatives which are primarily in Dublin. The European portfolio remains underpinned by secure income with long weighted average lease length of 6.2 years to first break and 8.4 years to expiry, and strong portfolio occupancy at 92.5%.

I'd like to highlight 4 areas for Europe. One, we're delivering attractive asset management wins across the stabilized portfolio with the U.K. being a standout performer in the quarter. Two, good progress across our unstabilized assets and development projects continues. Three, the growth potential we previously discussed across our multi-family or PRs portfolio is now coming through strongly, and four, we generated profits and attractive returns from our non-core sales program.

So first, looking at our asset management wins across our stabilized portfolio. We completed 83 commercial lease transactions in the first half of the year across 1.1 million square feet. This delivered over $6 million of incremental NOI to KW, 9% ahead of previous passing rents. Strong contributions came from new leases and rent reviews across the U.K. portfolio, with the rent reviews delivering an attractive 20% growth above previous rents.

The Shelbourne Hotel in Dublin, is our single largest NOI contributor for the company. The value-add CapEx we've made at this iconic asset is paying off, as we've seen NOI grew by 120% now, since acquisition. With additional CapEx investment underway with the goal of achieving further increases in ADRs, and NOI.

Second, the team has made good progress with those unstabilized assets and development projects. We acquired Northbank in Dublin, in December 2017, which is a 124 unit property that sits next to our 81 unit Liffey Trust property. These assets are located in the North Docklands submarket, which we see as a next growth opportunity in Dublin.

We're making excellent progress in refurbishing and leasing up vacant units, where renovated units are being well received and we're achieving rents ahead of business plan. We also received planning permission at our exciting 68,000 square foot, Hanover Quay office development which is adjacent to our nearly completed Capital Dock campus. And our 64,000 square foot Kildare street office development, initial planning approval was received with final planning consent anticipated by year-end.

The Phase III development at Clancy Quay is well underway, and this new phase of apartments is on track to deliver 259 units, with completion expected by Q1, 2020. Once completed, this project will total 845 units and be the largest apartment community in Ireland.

Lastly, at our $400 million Capital Dock development after securing the anchor office occupiers JPMorgan and indeed we're progressing on the marketing of the retail space, which is currently under construction. The entire Capital Dock development, which is one of the largest single phase developments in all of Ireland, will complete by year-end.

Thirdly, as you know, we've prioritized growing our PRS portfolio, where our ambition is to double our units to exceed 5,000 units over the next few years. In the second quarter, we completed the acquisition of the Elysian in Cork, Ireland and it's a market-leading community, adding 206 prime PRS units to our portfolio in Ireland.

The residential element is well leased, but under rented and we are in advanced discussions with interested parties on the vacant commercial space. And we'll also be implementing the Kennedy Wilson model of adding tenant amenities to this community.

The quarter was highlighted by the completion of our 50-50 Irish PRS joint venture with AXA Investment Managers-Real Assets, a global leader in real estate investments and the leading real estate portfolio in asset manager in Europe. The joint venture commenced with an initial portfolio of 1,173 units and it's expected to grow rapidly to over 1,800 units, including those under contract and under construction.

This joint venture will not only contribute to delivering on our growth targets to double our units in excess of 5,000 units, but it is also a significant first step in growing our European third party investment management platform.

And lastly, our asset sale program delivered $214 million of gross proceeds to KW in the first 6 months of the year, with almost a $100 million in Q2, '18. Much of our disposition effort remains focused on assets where we have completed our asset management plan with the U.K. continuing to deliver strong returns and comprising about 83% of total European dispositions.

Sales for the half year delivered a return on cost of 43%. Overall, our European portfolio continues to perform well and we expect further good news in the second half of the year.

And with that, I'll hand it back to Bill.

Thanks, Mary. So looking forward I'd like to discuss the current market environment and where we see opportunities. In the U.S., we remained focused on growing our Vintage Housing, affordable platform, where we can leverage tax credit equity and grow the platform with minimal KW equity.

We are targeting an additional 2,600 units by 2021 and we expect to get the platform up to 10,000 units soon thereafter. On the market rate side, we continue to find selective opportunities in our core markets in the Pacific Northwest, Northern and Southern California, Salt Lake City and Boise. Additionally, we have plans to build over 600 additional units in our California market rate portfolio, all of which will commence in the next 9 months.

In total, we anticipate adding 4,000 market rate in affordable U.S. multifamily units over the next few years. In Europe, we are focused on growing our multifamily presence in Ireland to over 5,000 units, while also continuing to evaluate opportunities in the U.K. We also look to sell smaller, lower yielding and non-core assets that we originally purchased in large portfolios from financial institutions.

And finally, we look to continue to grow our investment management platform through raising a third party fee-bearing capital both in the U.S. and in Europe. We are currently on track to meet our goal of $1 billion in new fee-bearing equity in 2018 and expect further good progress to report on this platform.

I'm very pleased with our global business and the opportunities in front of us. We remain very well prepared with ample dry powder for any market opportunities that may arise. We delivered a record second quarter, while returning significant capital back to shareholders and we remain committed to executing our global strategy going forward.

With all of that, I'd like to open it up to any questions.

(Operator Instructions) Mitch Germain, JMP Securities.

Any pressure on development costs, steel or potentially payrolls?

We haven't seen that Mitch. And as I think we've outlined most of the development that we're doing currently is in Dublin. And so we haven't seen any noticeable increase in costs. I think we've all read -- there's seems to be some shortage of skilled workers across the globe, but it hasn't shown up yet in any of our costs.

Great. It sounds like asset sales will continue to be part of the mix in the near term. And I was curious, you did a big portfolio in the U.S. on multi-family. I know some of the focus was to sell some of the smaller U.K. assets. How should we think about the population of what will be sold in the back part of the year?

Well I'm going to let Mary weigh in on the European side, but I think we've said in the first quarter call that the -- the gross dollars in terms of what we sold this year was probably going to be smaller than last year, but our ownership interest in the things that we sold this year was by going to be higher than it was last year and that's actually -- exactly what's happened so far. So Mary, do you want to comment on some of the smaller asset portfolios that we inherited from the 2 big deals that we did?

Sure. Yes, I mean, the largest deal that Bill is referring to, is the Gatsby deal where we bought 150 assets from 6 different receivers from an insurance company. So these were assets that all needed some value-add, some CapEx and some letting. So as we've continued to do that, we will continue to roll out of those smaller assets as Bill mentioned. And really more focused on our larger assets in our CapEx and stabilizing our assets that are not quite stabilized yet. So when you look at the 10 assets that we sold in the quarter, those are all small assets averaging roughly GBP 9 million and getting not only have we increased income on those, but we're also getting very good spread between where we purchased those and where we're selling them. So that the demand in the liquidity for those smaller assets, assets that really do continue.

Great, that's helpful. And then the last for me. The -- actually joint venture, obviously, they took out a partner of yours in the couple assets and obviously there is a bunch of dry powder for future growth. Is it the intent to maybe develop, redevelop on balance sheet and then sell a stake into the joint venture or is the venture is going to be doing development? I guess there's some flexibility there, but maybe if you can describe the venture itself and what you think actually brings to the table?

Bill, do you want me to take that?

Yes, I would start by saying that I think as most of you know [Aptus], one of the largest financial companies in the world. And so it was -- I would say an incredible achievement on the part of Mary and her team to get the joint venture, put together in the first place. But from there Mary, do you want to comment?

Yes, I mean that the -- the AXA folks, it's a great partnership because they're completely like-minded, they see the demand in Ireland for housing as we do, they're smart partners, they're responsive, so very, very good partners. We're super pleased with that joint venture. And so yes, they want to grow the business, the platform as we do. We'll continue to try and buy the Northbank and/or Elysian type assets, which were basically completed. But perhaps there's a piece of land next to you, for example, Northbank where we could also develop assets. So Kennedy Wilson is acting as the development manager and the asset manager of these assets; deal finding and day to day asset management, but with a great partner who -- like I said really sees the same opportunity as we do.

Craig Bibb, CJS Securities.

Mary since you're answering a lot of questions, I'll ask 1 or 2. I think Bill noted that the U.K. office accelerated and I know you guys have actually been seeking claiming approval to expand the couple of your office property. Could you give us some color there?

Yes, I mean, you're probably talking about in terms of seeking to expand the Friars Bridge Court outside, which is 100,000 square foot asset in the South Bank location in London, which is great location actually very tight office market there, regenerating market with lots of hotels, lots of technology driving the demand in that submarket. And so we got planning there couple of years ago to double that footprint, but we do have very, very strong interest in the whole building, in the 100,000 square feet. It's currently let right now on short-term leases well below market rents and so keep your eye on that one because we're pretty close to announcing something there that could be interesting.

And that would be to let the whole thing or?

Yes.

And whether any other like major, I know in total year lease-up was pretty good in the U.K., was there anything else of note in terms of that would have accelerated office in the quarter?

Yes, no, we had a great leasing quarter and a lot of it was -- not only was it leasing up vacant space, which the U.K. team did a great job and but it was also on rent reviews. And so as I mentioned in my remarks, we did rent reviews at 20% above previous passing rents. And so that -- that's just kind of indicates, I think that the U.K. portfolio that we own is sub -- under rented, and it's also a lower rent profile. So when you think about London oftentimes you think about higher rent, Mayfair type rents or city-type rents, where our rents are quite low which that I think makes it defensive, but also opportunistic. So we're super pleased with the asset management work that our team are executing on and should have a great second half as well.

And then Bill, did you say Kennedy-Wilson is planning to build 600 market rate multifamily units in California. Is that new and…

That's correct. One of the projects that will commence construction on shortly is in Santa Rosa which is of about 160 units and then we've got another larger project that were -- will commence on probably later this year in Southern California, that will be a site that is a combination of market rate units and affordable units on the same site. And as I've said on prior calls, the very big misnomer when you talk about the affordable businesses, the quality of that construction and what those buildings look like and literally unless you told somebody when you drive up to an affordable multifamily asset, you can't tell the difference of whether it's market rate or affordable. But the one we're going to be starting on Southern California pool, as I said will start later this year. So both of those will take roughly, in Santa Rosa one slightly less time, the one in Southern California will take about 30 months to build.

Could you provide an update on the remaining assets under management in Funds V and below, and then when do you expect Fund VI to close?

Yes. So we just closed out Fund IV and so that one is history now. We generated gross returns of roughly, Matt, 16% on that?

Yes, that's right.

And so Fund V has done a star performer, some of the assets that were sold in that 6-apartment portfolio, we're actually in Fund V, so that that fund is fully invested, but we'd now not have returned how much of the capital in that.

I think, we're roughly 50% return on the capital with the majority of the portfolio still out there to sell over time.

We expect that one, Craig, to see the results of Fund IV. As far as Fund VI is concerned, we've about -- so it's really rough -- but we have about $350 million of unspent cash sitting in that fund right now. We're at about slightly under $500 million of capital raise and we expect that, as I've said before, closeout somewhere around $700 million, $750 million.

Eric Miller, Heartland Advisors.

A question on, Mary was talking about the AXA relationship and I'll paraphrase, but I think she mentioned, would see this sort of as a first step in growth in European third party investment business. Can you give us some sense as possible directions of where you would see that growth? Would it be with AXA going into different geographies, different property types, would you look at finding somebody like an AXA in a different geography in Europe? Maybe just a little more color on that.

Well, I think initially as Mary said that, Eric, the focus is going to be on Ireland and particularly in Dublin. And we've got a couple of larger properties that we're very focused on right now in terms of adding to the portfolio. And I think like we've done all, Mary and I have been together now for almost 30 years and as we've done over our whole careers what we always try and do is, build on these relationships in other places. And I think really one of the really good examples of this is what we've been able to do, what I think, I can say the name right Mary, the other insurance company? So we -- like with MetLife, we started with a lending relationship with that in Ireland primarily. We've done several, several loans with them in Ireland, but that led to us meeting all of the folks in the U.S. MetLife operation and in the second quarter, we just closed our first loan of significance with MetLife in the United States. So we're always looking to grow these relationships, I'd would say though that we're off to a very, very good and fast start with AXA in Dublin, which is, as I said, where our main focus is right now.

Would you think about all the success you've had in Fund IV and it looks like Fund V and now starting Fund VI? Would you try and replicate that in Europe at some time?

We're -- and so I'll let Mary add to that we now have 2 people on our team. One that we transferred from the United States just recently to London. But we've 2 people full time, in addition to it -- the efforts that Mary is putting into those, that we have 2 people there full time, raising third-party capital in Europe. But Mary you want to amplify on that?

Yes, I mean, we're in the early stages now of just putting all of our documentation together and communication with a variety of potential LPs. And I would say the interest levels very good and it's something that we expect to have success with for sure in terms of the fund format in Europe, just as we've done in the U.S.

I'd add to that, since we went public here in roughly 2010, we've had many great partnerships with a whole variety of people including Fairfax and all of our partners have capacity. And so and even though we're are clearly in the process of continuing to raise money in these fund formats, we feel like we've any number of people, that are willing to do separate account platforms of size depending on whether there is meaningful opportunities to work, to invest that money.

I got to congratulate you on the timing of the buyback. It's nice to see a buyback executed so well at about 17%, 18% of below where the stocks trading today. So that's a great job.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Bill McMorrow for any closing remarks.

Well, I'd like to thank everybody as we always do for all of your support. We're very happy with where the company is at, at this point in the year. As I've said, we had a great first half and we're looking forward to finishing up this year on a very strong basis. So thanks everybody.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.